The demand for dividend yield isn’t going anywhere and 2014 certainly made that clear.

High-dividend-yielding stocks outperformed as lower interest rates continued to drive demand for yield. REITs had a 30% total return, the group’s best year since 2010, while utilities finished as the top S&P 500 sector, up 29%.

The market is certainly getting what it’s asking for: S&P 500 dividends hit an all-time high of US$93-billion in the fourth quarter and that trend is expected to continue in 2015.

Barclays’ head of U.S. equity strategy, Jonathan Glionna, is forecasting a 7% increase to US$42 per share for the index — that’s equivalent to a 2% dividend yield.

But rather than simply target yield for yield’s sake, he recommends buying companies that are growing their dividends.

“This reduces duration and should lower volatility while preserving risk-adjusted returns,” Mr. Glionna said in a research note.

His preferred strategy targets stocks that have a yield above the S&P 500 median and dividend growth of 10% or higher.

On a sector basis, he highlighted financials as offering the best dividend growth potential in 2015. Dividends from the financial sector grew 22% in 2014 and are expected to rise another 13% in 2015.

The consumer discretionary, industrials and technology sectors are also expected to have high dividend growth in 2015, while utilities and telecoms are expected to lag.

Lower oil prices will contribute to a significant drag on earnings for the energy sector, but they won’t hold back what appears to be a healthy growth trend for U.S. stocks.

The average analyst estimate for S&P 500 fourth-quarter earnings growth is a somewhat soft 5.4%, particularly when compared to the three-year average of 6.7%. However, Jonathan Golub, chief U.S. market strategist at RBC Capital Markets, believes the trend growth is closer to 11% when accounting for the drag from energy and a conservative earnings beat assumption of 3%.

“Excluding the impact of energy, the decline in earnings appears to be in line with its historical average,” he said in a research note.

Oil prices have plunged more than 55% since June, and Mr. Golub expects a roughly 20% decline in year-over-year EPS for the energy sector. This is forecast to produce a 3% drag on overall S&P 500 earnings.

Analysts’ EPS estimates have fallen almost 7% since September, with energy contributing approximately 270 basis points to the decline.

As a result, the strategist noted that non-cyclicals will likely outperform cyclicals as they have for nine of the past 10 quarters.

Mr. Golub also highlighted the anticipated relative outperformance that domestically oriented companies should show, in large part because of the stronger U.S. dollar, which was about 9% higher than in Q4 2013. Slower global growth and greater cyclicality in more global companies should also help U.S.-oriented stocks outpace their peers.

“Non-U.S. focused business are expected to experience outright declines in both revenue and earnings,” the strategist said.

]]>http://business.financialpost.com/2015/01/12/what-to-watch-for-in-q4-sp-500-earnings/feed/0stdtraderIs early performance a reliable indicator of the year ahead in stocks?http://business.financialpost.com/2015/01/09/is-early-performance-a-reliable-indicator-of-the-year-ahead-in-stocks/
http://business.financialpost.com/2015/01/09/is-early-performance-a-reliable-indicator-of-the-year-ahead-in-stocks/#commentsFri, 09 Jan 2015 13:40:55 +0000http://business.financialpost.com/?p=510115

Earlier this week, we took a look at what the performance of U.S. stocks in January means for the year as a whole.

Based on data going back to 1928, the S&P 500 is up 80% of the time over the 12-month period with an average return of 13% when equities rise in the first month of the year.

Since 1946, the first month of trading has also accurately predicted the direction of the Dow Jones Industrial Average 80% of the time.

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Going back to 1901, however, the first month predicted the year’s direction only 73%, and in the past 15 years, it proved reliable 67% of the time.

But how about the first day or week of trading?

Robert Sluymer, a technical analyst at RBC Capital Markets, found that since 1901 and 1946, the first day of trading predicted the year’s direction 61% of the time. In the past 15 years, it was a much more accurate indicator, forecasting the Dow’s direction 80% of the time.

The direction of trading in the first week of the year predicted the year’s direction 63% of the time since 1901, 70% of the time since 1946, and 60% of the time in the past 15 years.

“How an investor would employ this data remains questionable to us,” Mr. Sluymer said in a research note, adding that since 1901, the Dow has been up on the year 65% of the time.

]]>http://business.financialpost.com/2015/01/09/is-early-performance-a-reliable-indicator-of-the-year-ahead-in-stocks/feed/0stdtraderWhat January means for the year in stockshttp://business.financialpost.com/2015/01/07/what-january-means-for-the-year-in-stocks/
http://business.financialpost.com/2015/01/07/what-january-means-for-the-year-in-stocks/#commentsWed, 07 Jan 2015 13:06:13 +0000http://business.financialpost.com/?p=508976

January is a pretty good predictor of the year ahead for stock markets.

Markets are up 80% of the time over the 12-month period with an average return of 13% when equities rise in the first month of the year.

But stocks rise only 44% of the time and the S&P 500 averages a 1.9% decline when January’s performance is negative.

Going back to 1928, the U.S. equity benchmark has posted positive annual returns 67% of the time and has an average annual return of 7.5%.

Stephen Suttmeier, a technical analyst at Bank of America Merrill Lynch, noted that U.S. stocks fell in January 2014, but the year was still positive.

He also pointed out that returns for the first five trading sessions of the year serve as a so-called ‘January Barometer.’

Using data going back to 1928, the analyst found that above-average returns during the year generally occur when the first five days are up and below-average returns occur when the first five days are down.

However, 2014 didn’t follow this pattern either, as the S&P 500 dropped in the first five sessions of the year.

A strong U.S. dollar is often viewed as good for small caps given their more domestic focus, and bad for large-cap multinationals due to the negative earnings impact from currency effects. But Tony Dwyer, chief U.S. strategist at Canaccord Genuity said the reality is much different.

He pointed to the last period of sustainable strength for the U.S. Dollar Index (DXY ) that followed a multi-year basing period.

The DXY in 1996 began to move higher from its early-1990s range, then rallied sharply into the Russian debt default and the failure of Long-Term Capital Management LP in 1998.

Mr. Dwyer noted that this period had slowing global growth and accelerating U.S. economic activity despite the recovery already being five years old.

Large caps were also outperforming small caps by a wide margin, the S&P 500’s valuation expansion continued, and the outperforming sectors were IT, financials, health care and consumer discretionary.

Sound familiar?

A strong U.S. dollar may threaten the rate of EPS growth, but Mr. Dwyer is confident that the threat of a recession is years away.

He also believes the lack of attractive investment alternatives will continue to drive investors to stocks, and historical precedent suggests further valuation expansion.

Valuation multiples expanded across most sectors as the S&P 500 rebounded from its mid-October lows, with only telecom and materials seeing a contraction in forward P/Es.

Most sectors are trading close to their historical average in terms of relative forward P/E, but Bank of America Merrill Lynch strategist Savita Subramanian highlighted a few exceptions.

Utilities, for example, trade at a premium of more than 20% to its historical average relative P/E and the sector is at its highest absolute P/E since 2001.

Energy, however, is trading at a discount of almost 15% to its long-term average relative multiple. It’s also the only sector (other than health care) trading at a large discount to history on a relative price-to-book and relative price-to-operating cash flow basis, along with relative forward P/E.

BofAML energy analysts believe many of these energy stocks are pricing in oil below US$70 per barrel.

If interest rates rise and oil prices rebound, Ms. Subramanian thinks the valuation moves for utilities and energy could be dramatic.

The strategist also highlighted the importance of positioning among active fund managers this year.

In October, the performance spread between the most overweight and underweight stocks by these managers was roughly eight percentage points — near the widest so far in 2014.

Ms. Subramanian identified the industries that are most underweight by managers and inexpensive versus history on a relative forward P/E, as well as those most crowded and also expensive using the same measure.

Metals and mining, autos and communication equipment proved to be the most inexpensive and neglected, while aerospace and defence, textiles and apparel and luxury goods were the most expensive and overweight.

History suggests you should be skeptical of any sentence that begins “history suggests.”

For example, you may ask your history-loving friends, what does the textbook say happens in the markets after the Federal Reserve ends a bond-buying program that swelled its balance sheet to $4.5 trillion? The answer, of course, is what is known on the Web as a 404 error code: “File not found.”

Yet this is the big question looming above all of the perfectly reasonable suggestions that history is currently making, whether it regard variables that could affect the market such as the makeup of Congress or variables studied just for fun, like what happens to stocks after the Eagles start off 6-2 and need to switch quarterbacks halfway through the season.

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That said, whenever history suggests anything, it’s hard to ignore. Sort of like when your spouse “suggests” you get your lazy, worthless bones off the couch and do some housework. Since no one’s crunched the numbers on the Eagles situation yet, here’s what history suggests about midterm elections: they’re generally followed by better-than-average gains in stocks.

Fourth quarters of midterm years have produced an average gain of 8 percent in the past 65 years, according to the Stock Trader’s Almanac. They’ve been followed by rallies of almost that much in the next three months, making the average 16 percent two-quarter rally the best combination of the election cycles.

To break it down further, history is suggesting that the best thing for the stock market would be for Republicans to gain control of both houses of Congress in today’s elections.

The S&P 500 has risen an average 15.1 percent in calendar years when a Democratic president has been opposed by a Republican-controlled Congress since 1945, according to S&P Capital IQ equity strategist Sam Stovall. To be fair, the returns are nearly identical — 15.07 percent — when Republicans control both the White House and Congress, but this time around that scenario is impossible unless you can find a way to invest in Ann Coulter’s daydreams.

At first blush, that sounds like an impressive track record. Since 1945! That’s like, a couple hundred years or whatever. Yet as Stovall points out in his report, the Democratic president/Republican Congress scenario has only occurred in eight years since 1945, so there’s not a ton of data to work with.

The returns for a split Congress with a Democratic president, which only happened in four years since 1945, have averaged 13 percent. And the S&P 500 has gained 9.8 percent on average in the 22 years when a Democrat controled the White Houses and both chambers of Congress, according to Stovall’s report.

“Midterm election years can be broken down and sliced into so many ways, it becomes hard to make any reasonable inference,” BTIG LLC chief strategist Dan Greenhaus wrote in a note to clients. “We would hardly classify anyone’s data set as statistically significant.”

In other words, history suggests that some historical data points are worth more than others.

The S&P 500 continues to sit near its all-time high, but U.S. small caps aren’t faring nearly as well.

The Russell 2000 index is down about 3% so far in 2014, versus a gain of roughly 8% by the S&P 500.

Some believe the recent deterioration in U.S. small-cap technicals — marked by the Russell 2000 death cross (the 50-day moving average fell below 200-day moving average) — as a bad omen for the S&P 500. However, Scotiabank equity strategist Hugo Ste-Marie said there is no cause for alarm.

“Small cap death crosses are not a reliable technical signal for large caps,” he told clients, noting that the Russell 2000 has experienced 26 such incidents since 1979, versus just 16 for the S&P 500.

The strategist also highlighted the role that valuation is playing among U.S. small-cap performance.

Russell 2000 stocks that were trading at more than 35x forward EPS at the beginning of 2014 are down an average of 7% year to date. That compares to a gain of 0.6% for those index members that were trading below 15x.

“In our opinion, small cap underperformance doesn’t necessarily equate to broadening risk aversion,” Mr. Ste-Marie said. “U.S. small caps trailed large caps for most of the ’80s and ’90s, which turned out to be the strongest S&P 500 bull run in modern history. We expect small cap underperformance to continue.”

Nearly half of the stocks in the S&P 500 are yielding more than the five-year treasury bond, so it’s easy to see why the index attracts dividend-hungry investors.

Meanwhile, its dividend payout ratio has only begun to normalize from its century low in 2011, suggesting more dividend increases are ahead.

As a result, Bank of America Merrill Lynch quantitative strategist Savita Subramanian suggests the S&P 500 is the asset class best positioned to offer competitive and growing income in an environment of rising interest rates and inflation.

“Risk assets could see pressure with a shift toward income and capital preservation,” Ms. Subramanian told clients. “But the S&P 500 is a likely beneficiary of this rotation.”

The analyst believes individuals and pensions may be underestimating the cost of funding people’s increasing longevity, where longer retirements require a combination of capital appreciation and income growth.

She also suggested Baby Boomers’ real net worth is still 25% below peak, so the shift toward income may be gradual if they defer retirement.

“A common rule of thumb over the last few decades has been to buy what baby boomers are buying: from durable goods, cars, apparel and housing to today’s income generating investments,” she added. “Aging demographics, not just in the U.S. but across most developed economies, suggests a seismic shift in investor preference.”

It feels a little like 1996: the S&P 500 is hitting new all-time highs in the middle of the year despite slowing global growth and following a sizable gain during the previous year.

That year was also marked by fears of an interest rate hike due to an accelerating U.S. economy, along with several geopolitical risks such as Israel battling Hezbollah, Russia fighting Chechen rebels, and heightened fears of Islamic extremists as Osama Bin Laden declared Jihad on the United States.

Tony Dwyer, chief equity strategist at Canaccord Genuity, highlighted the similarities to the current environment. He pointed out that the S&P 500 was up only 5.8% through August 1996, yet it finished the year up 20.26%.

The index this year rose 8.8% through August, after climbing 30% in 2013.

“The events currently taking place in Russia, Israel and with the new extremist group ISIL certainly rhyme with those that worried investors in 1996 – yet as S&P 500 profit growth slowed, valuations continued to expand as the U.S. was the best alternative given growth outlook and currency,” Mr. Dwyer said in a report.

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Stephen Suttmeier, a technical analyst at Bank of America Merrill Lynch, noted the index has had only 42 bullish outside months since 1928, and the average one-to-12-month returns after such a pattern are well above average.

In the subsequent three-to-six-month period, the S&P 500 has risen 80% of the time with average returns of 4.1% after three months and 6.9% after six. The average 12-month return after a bullish outside month is 12%, versus the historical average of 7.6%.

“September seasonals are weak and everyone knows this,” Mr. Suttmeier told clients, noting it is the worst month of the year and is up only 45% of the time with an average return of -1.07% going back to 1928.

However, the analyst also pointed out that seasonal trends become more bullish after September/October and support the case for buying in September/October ahead of a rally into December/January.

Stock market bulls have survived yet another attack by the bears, who have once again showed their lack of resolve.

But technical indicators are painting a rather mixed picture, prompting analysts at Montreal-based Phases & Cycles to suggest indexes could continue to hit new highs, while warning of more volatility ahead.

David Tippin and Ron Meisels suggested that the August rally and important 105-day and 39-week cycles position the market in a new “up phase.”

However, they also cautioned that stocks are stretched at the moment, slightly overbought and in need of both a volume boost and new leadership.

For example, the S&P 500’s August rally occurred on declining volume, and the number of NYSE stocks making new 52-week highs continues to track lower even as the market moves higher.

“The autumn season could be a case of ‘up, up and away’ but September and October are months that have a track record of higher volatility,” the analysts said in a report. “With a historically volatile period approaching, stops appropriate to risk tolerance should be in place.”

They recommend buying selective sectors and individual stocks that have completed pullbacks and have a history of outperformance in late bull markets.

“One way or another, this is still a bull market worthy of investment; but it must be done cautiously and selectively,” the analysts said.

They noted that the outlook for the S&P 500 remains bullish, yet internal momentum showed some relative deterioration at the end of August compared to the July highs.

Meanwhile, the S&P/TSX composite index remains in a “major” bull market, they said. “There could be pull backs along the way, but this market wants to go higher.”

The Standard & Poor’s 500 Index, one of the most diverse benchmarks for stocks in America, is starting to resemble a collection of clones.

Three years of virtually uninterrupted gains for the U.S. gauge have resulted in 77 record closes since 2012 and a valuation quirk that some see as a sign of indiscriminate buying. A measure of how much price-earnings ratios among the 50 biggest companies vary has fallen to almost the lowest on record, data compiled by Bloomberg show.

Gaps between stocks shrunk after investors shifted money out of higher-valued technology and Internet companies and bought defensive industries such as consumer staples and utilities. Such rotations, which can be done with a click of a button using exchange-traded funds, show buyers are making too few distinctions among good and bad companies and could exacerbate selling once it begins, said Eric Schoenstein, co- manager of the $5.2 billion Jensen Quality Growth Fund.

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“There is less interest in trying to actually pick stocks versus just investing in markets,” Schoenstein, who is based in Portland, Oregon, said in a phone interview on Aug. 28. “If there were another 2008 somewhere on the time horizon, the fact that everything moves in lockstep up means they’d probably drop in lockstep down. That’s going to be very painful if that were to happen.”

Valuations for companies from Merck & Co. to PepsiCo Inc., whose steady earnings have traditionally made them defensive havens when the economy slows, are converging with those with at least twice the profit growth, such as Qualcomm Inc. and Apple Inc.

Price-earnings ratios among the 50 largest companies in the S&P 500 deviate from the mean by an average of about 22 percent, nearly the narrowest on record, according to data since 1990 compiled by Bloomberg. The study includes companies with a valuation multiple above zero and strips out the two highest each year.

“In theory, stocks shouldn’t be valued as similarly as they are,” Hayes Miller, the Boston-based head of multi-asset allocation who helps oversee $57 billion for Baring Asset Management Inc., said in an Aug. 27 phone interview. “It’s not a normal or sustainable situation.”

The last bull market ended with multiples in a cluster. In 2007, the deviation in price-earnings ratios for the 50 largest companies in the S&P 500 was about 25 percent from the mean. That’s the lowest level since at least 1990, the beginning of a decade when the average deviation was 37 percent. The index lost more than half its value in the next two years.

The S&P 500 fell 0.1 percent at 10:09 a.m. in New York.

Valuations were the most spread out near the peak of the Internet bubble, when technology shares commanded a premium. The deviation from the mean was 57 percent in 1999. The S&P 500 peaked the next year and plunged 49 percent through October 2002.

“The same kind of lack of distinction being made in the late 1990s occurred in only one area of the market, the dot-com boom,” Scott Clemons, the chief investment strategist at Brown Brothers Harriman Private Banking in New York, said by phone on Aug. 27. The firm oversees $28 billion. “People are buying stocks for the sake of buying stocks.”

The proliferation of ETFs, which invest in a basket of shares, makes it easy to accumulate large positions without regard to the individual companies. The ETF industry has exploded in recent years, with assets tied to American equities reaching $1.1 trillion.

Cash churning in and out of the funds will narrow valuations in the stock market over time as investors choose to transact in swaths of shares, rather than evaluate details such as company earnings, according to Brent Schutte, senior investment strategist at BMO Global Asset Management. The firm has over $240 billion.

In March, technology ETFs absorbed $970 million and investors pulled cash out of safe-haven groups. That trend reversed in the next two months, with cash coming out of computer funds and into utilities and consumer staples.

“In the 90s, everyone was a stock picker,” Schutte said in a phone interview from Chicago on Aug. 28. “Fast forward to today, what’s everyone’s calling card? They do strategic asset allocations and they buy index funds.”

In this bull market, unlike the dot-com boom, stocks from almost all industries are climbing. An average of 380 companies in the S&P 500 rose in each of the last five years, compared with 307 in the 1990s, data compiled by Bloomberg show.

“There are lots of companies and industries doing very well, so the market doesn’t feel the need to price one group much higher than everything else,” Doug Foreman, Los Angeles- based chief investment officer at Kayne Anderson Rudnick Investment Management, said by phone on Aug. 27. The firm oversees about $9 billion. “It’s much better balance.”

Merck, the second-largest U.S. drugmaker, trades at 17.2 times profit and analysts forecast profit will be little changed in 2014, according to data compiled by Bloomberg. The valuation matches Qualcomm, a company with estimated earnings growth of 32 percent.

Apple’s faster growth isn’t being rewarded either. The iPhone maker has a price-earnings ratio of 16.6, compared with 20.8 for PepsiCo. Analysts predict Apple will boost income by 14 percent this year, versus a 5 percent pace for the maker of soda and Frito-Lay snacks.

“There’s a whole group of stocks in growth purgatory,” Todd Lowenstein, who helps manage $16 billion at Highmark Capital Management in Los Angeles, said in an Aug. 27 phone interview. “Your returns from here are going to be less about multiple expansion and more about the fundamentals.”

Morgan Stanley on Tuesday said the S&P 500 could rally to 3,000 by 2020, propped up by what it says could be the longest U.S. economic expansion ever.

The very bullish outlook comes as the S&P 500 continues to make new highs, breaching the 2,000 mark for the very first time last week. On Tuesday, it closed down 1.14 points, or 0.06%, to 2,002.23.

“Our best guess is that an S&P 500 peak of near 3,000 is possible should the U.S. expansion prove to have five or more years left to it, based on 6% per annum EPS growth through that time frame and a 17x price-to-earnings ratio,” said Adam Parker, Morgan Stanley’s chief U.S. equity strategist, in a research note.

The U.S. economy recently surprised economists by growing by 4% in the second quarter, significantly above the average forecast of 3% and the strongest growth since the economy emerged out of recession in July 2009.

“Post-WWII expansions have lasted an average of five years, while the three most recent have lasted an average of eight years,” Mr. Parker said, adding the longest expansion went on for 10 years. “An environment of low volatility can help extend the life of an expansion, and volatility in GDP growth has fallen over time.”

The strategist said the current recovery has been going on for five years now, but history shows that the recovery could very well continue until 2020.

The S&P 500’s recent move past 2,000 capped its best August in 14 years, with the index returning 3.8% for the month. It was a surprising return for investors who usually expect little in the way of profit for the month, given that trading volume historically hits its lowest level in August.

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But the majority of analysts don’t see much further upside for the year. Goldman Sachs currently has a year-end price target of 2,050 for the index, while RBC Capital Markets has a target of 2,075.

Some analysts who are below the current 2,000 level are sticking with their call. BMO Capital Market’s chief investment strategist Brian Belski said on Tuesday that he still sees the S&P 500 ending the year at 1,900.

“Despite the market’s strength, we still remain comfortable with our now more cautious stance,” he said. “As we have frequently mentioned, we believe investors are underestimating the market implications of the removal of QE bond purchases, which we believe have buoyed stock prices throughout this cycle.”

Analysts currently forecast that the U.S. Federal Reserve will end its monthly asset purchases by October, setting the stage for an interest rate hike in mid-2015. Mr. Belski said he will not change his target for the S&P 500 until he sees how stocks react to the conclusion of the QE program.

“We would begin to change our minds if stock prices can prove they can remain strong against improving economic conditions and the associated higher interest rates that are likely to follow, while avoiding a major geopolitical shock,” he said.

Jonathan Golub, chief U.S. market strategist at RBC Capital Markets, is on the side of the bulls. He said corporate earnings could be strong enough to drive the S&P 500 higher over the next few years even if there is an interest rate hike next year.

“Earnings projections for 2015–16 have been rising since April, reversing a downward trend,” he said. “We believe this reflects growing optimism (especially among CEOs via stronger guidance) on the direction of the economy. Given a lower cost of capital and enhanced growth prospects, we see further upside to stocks over the next several years.”

]]>http://business.financialpost.com/2014/09/02/sp-500-at-3000-morgan-stanley-thinks-so-by-2020/feed/0stdWhy U.S. stocks have even more upsidehttp://business.financialpost.com/2014/08/25/why-u-s-stocks-have-even-more-upside/
http://business.financialpost.com/2014/08/25/why-u-s-stocks-have-even-more-upside/#commentsMon, 25 Aug 2014 12:24:15 +0000http://business.financialpost.com/?p=469367

U.S. stocks are at an all-time high, and RBC Capital Markets’ chief U.S. strategist Jonathan Golub thinks they have more room to run.

The S&P 500 hit a new record on Thursday, closing at 1,992.37, with the recent strength attributed largely to falling market volatility. The VIX is down to about 11.5 from 17.0 on August 1.

Mr. Golub noted that during the recovery, every 5% decline in volatility has corresponded to an average 1% increase in equity prices.

He also pointed out that stocks look more attractive today than at the beginning of 2014.

The S&P 500 has risen 7.6% so far this year, or 9.0% including dividends.

Despite the healthy performance, Mr. Golub noted that the valuation gap between stocks and bonds has widened.

Specifically, Baa-rated corporate bond yields imply a 21.3x multiple, whereas stocks are trading at 15.5x. That compares to 18.6x and 15.3x, respectively, at the end of 2013.

Consumer discretionary stocks have been the best-performing group in the U.S. since the market bottomed in March 2009 with a price return of more than 420%.

But Jonathan Golub, chief U.S. market strategist at RBC Capital Markets, on Monday downgraded the sector even though he remains positive on the broader market and the economic backdrop.

Mr. Golub moved his recommendation to neutral, pointing out that his previous overweight rating was based on a strong outlook for durables, media and luxury goods, coupled with a weaker forecast for retail, restaurants and apparel.

“…The median consumer remains under pressure, a headwind for restaurants, retail, and apparel,” the strategist told clients, noting that same-store sales forecasts for the second half of 2014 are below 3% despite an expected improvement in GDP.

“Higher-end consumers have fared better,” he added, noting that only the top fifth of households have grown their real income since 2008.

Mr. Golub has also become more cautious on durable goods, as the healthy rebound in new vehicle purchases indicates less upside going forward.

Meanwhile, housing has come under pressure and is expected to stay that way as interest rates rise.

And while growth in media is still a standout in the sector, the strategist cautioned it should also moderate from higher-than-average levels.

The recent weakness in U.S. equity markets is setting the stage for a trading rebound.

RBC Capital Markets technical analyst Robert Sluymer pointed out that short-term indicators are becoming oversold as the S&P 500 approaches its next support level near 1,900 and the Russell 2000 tops roughly 1,110.

“Daily momentum indicators have moved from overbought levels in late-June back toward oversold levels that often/usually accompany trading rebounds,” he told clients.

Despite signs of improvement, Mr. Sluymer noted the risk window will likely remain open through the third quarter. He expects the S&P 500 to rebound in early August, but cautioned that a growing number of stocks are peaking in the intermediate term, suggesting further possible weakness in the quarter.

“By mid-September we would expect intermediate-term indicators, tracking 1-2 quarter swings, to have moved back toward oversold territory setting the stage for a seasonal Q4 rebound,” he said.

Mr. Sluymer listed some stocks that are demonstrating relative signs of improving performance, particularly those in the consumer discretionary sector.

Leading the way are Walt Disney Co., Priceline Group Inc. and Delphi Automotive PLC, while emerging names include Macy’s Inc., Newell Rubbermaid Inc. and Nordstrom Inc. He noted that TJX Cos. Inc., Urban Outfitters Inc., Home Depot Inc. and Lowe’s Cos. Inc. appear to be bottoming or look oversold.

The analyst also highlighted several financials, including TD Ameritrade Holding Corp and Charles Schwab Corp., and energy refiners such as Valero Energy Corp.

With Apple Inc.’s repurchases staking a claim as the most profitable on record, buybacks remain one of America’s most popular antidotes to bears.

The iPhone maker is up 25 percent since it spent $18 billion on its own shares between January and March and rallied 32 percent after a $16 billion buyback in 2013. Those are the highest four-month returns among the 20 biggest quarterly repurchases by any company since 1998, according to data compiled by Bloomberg and Standard & Poor’s. S&P 500 constituents have spent $211 billion on their own stock this year amid concern the five-year bull market is prone to selloffs such as last week’s 2.7 percent retreat.

Spurred on by zero-percent interest rates and the highest cash balances on record, companies are plowing capital into the equity market to curb supply and buttress per-share earnings. While Scott Wren of Wells Fargo Advisors LLC says there are usually better things to do with capital, companies with the most repurchases have beat the S&P 500 during the bull market.

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“It’s a low-quality way to increase your earnings and obviously I’d much rather see companies grow the business through revenue,” Wren, the St. Louis-based senior equity strategist at Wells Fargo Advisors, said in a phone interview. “But when the economy’s growing at 2 to 2.5 percent, you have to do what you can to keep the ball rolling.”

Indexes of U.S. and global equities fell in July, halting a five-month streak of gains amid speculation the threat of inflation is rising in the U.S. while Argentina defaulted on debt and Portugal’s Banco Espirito Santo SA was ordered to raise capital.

There were $159 billion of buybacks in the first quarter, the most active single three-month period since 2007, when companies spent $172 billion in the third quarter. Shares bought from April through June are on pace to reach about $130 billion, according to S&P.

Apple’s $18 billion repurchase in the first quarter and the $16 billion it spent between April and June of 2013 are the two biggest buybacks by any company in data compiled by S&P starting in 1998. They came as the stock advanced as much as 77 percent over 15 months after falling to a 16-month low in April 2013.

The return followed the weakest period for Apple shares in the last decade. After vaulting almost 900 percent from the end of 2005 through September 2012 and becoming the world’s largest company by market value, Apple plunged 44 percent in seven months amid concern about new products and competition.

“Their timing was impeccable,” Todd Lowenstein, who helps manage $16 billion at Highmark Capital Management in Los Angeles, said in a July 31 phone interview. “They went in big, and it said to the market that they had confidence in their business plan and thought their stock was grossly undervalued. That’s worked out well for them.”

Companies spending the most on their own stock are outperforming the S&P 500. The 100 firms with biggest buybacks relative to market value have gained 5.5 percent this year, compared with a 4.9 percent increase in the benchmark index, according to data compiled by Bloomberg.

The S&P 500 fell 0.3 percent to $1,933.55 as of 10:43 a.m. in New York.

The record is mixed among the biggest repurchasers. Microsoft Corp., the world’s biggest software maker, is up 16 percent in 2014 after spending about $3 billion, while LyondellBasell Industries NV has climbed 35 percent after spending $3.1 billion. At the same time, Exxon Mobil Corp., Boeing Co. and EBay Inc. have seen their shares fall.

Timing repurchases for maximum return has proven challenging for American companies. A study of 5,498 companies by professors at the University of Kentucky updated in 2014 found that while the average annual return on buybacks was 7.7 percent, companies would have gotten gains of 2 percentage points more per year had they not tried to time the market and bought shares at a constant level quarter to quarter.

“Given their inside information and experience, managers should be able to add value through strategic repurchase timing, buying when share prices are low,” the authors, Alice A. Bonaime, Kristine W. Hankins and Bradford D. Jordan, wrote. “Yet, we find that companies are more likely to execute a repurchase in quarters when stock prices are higher.”

To investors such as Skip Aylesworth of Hennessy Funds and Bruce Bittles of RW Baird & Co., buybacks are a mixed blessing, taking stock out of the market while doing nothing to increase earnings before per-share calculations.

“A lot of companies are cash rich, and if they don’t have a lot of investment options, they’ll continue to do buybacks of shares,” Aylesworth, a portfolio manager for Hennessy Funds, which oversees about $5 billion in Boston, said in a July 30 phone interview. “To a certain extent, that could be a bearish indicator for the future.”

Cash held by S&P 500 companies excluding financials, utilities or transportation firms totaled a record $1.30 trillion at the end of last year, according to S&P. It slipped to $1.23 trillion at the end of March. Apple had $164 billion of cash and liquid securities as of last quarter.

The ratio of Apple’s per-share profit growth to its overall earnings has increased due to buybacks. Per-share income climbed 19.6 percent last quarter from a year ago compared with a 12.3 percent rise in net income.

Twenty percent of companies reporting second-quarter results by July 31 received a “significant” boost in per-share earnings by buying stock, according to Howard Silverblatt, an analyst at S&P Dow Jones Indices.

“It jacks up per-share earnings when you buy stock back, but it doesn’t jack up earnings,” Bittles, chief investment strategist at Milwaukee-based Baird, which oversees $110 billion, said in a July 31 phone interview. “There’s lots of cash on these balance sheets, but there’s also a lot more debt than there was in 2007 as well.”

In July, Bed Bath & Beyond Inc. paid a premium in the bond market to buy its shares as the retailer tries to stem a 23 percent plummet this year.

The seller of home furnishings, whose debt is rated Baa1 by Moody’s Investors Service and A- at Standard & Poor’s, issued $1.5 billion of bonds July 14, including $300 million of 10-year notes that yielded 3.75 percent. That was higher than the 3.58 percent average for bonds from U.S. retailers with similar credit grades and maturities.

Since reaching a record of $80.48 in January, Bed Bath & Beyond’s stock has fallen to $61.70.

The decision by Bed Bath & Beyond to take out loans for a share purchase may have been a defensive move to ward off potential activist investors, according to Jaime Katz, an analyst at Morningstar Investment Services Inc.

“If you think about what a private-equity shareholder might do if they come in and get involved, debt already on the balance sheet may prohibit them from finding the business as attractive,” Chicago-based Katz said, via phone.

While companies are carrying out more repurchases than any time since the financial crisis, growth is slowing in plans for new ones. Announced buybacks so far this year total $298 billion, compared with $387 billion at this time last year, according to David Santschi, chief executive officer at TrimTabs Investment Research.

Shares with the most buybacks held up better than the broader market in last week’s selloff. The S&P Buyback Index of 100 companies doing the most repurchases fell 2.2 percent over the five sessions, compared with 2.7 percent in the S&P 500, according to data compiled by Bloomberg.

“It’s normally a bullish sign that companies are buying back their stock because they think it’s undervalued relative to where its potential is,” Jerry Braakman, chief investment officer of First American Trust in Santa Ana, California, said by phone. His firm oversees $1.1 billion. “It ultimately puts money back into investors’ hands, and they can redeploy it as they see fit.”

U.S. Federal Reserve chair Janet Yellen’s recent comments about several sectors prompted some concern among investors, as well as some selling. But it is worthwhile to note that biotechnology and social media have been among the best-performing areas in the U.S. market for the past 18 months.

So it should come as no shock that multiples are stretched, noted Brian Belski, chief investment strategist at BMO Capital Markets.

“As such, comments regarding valuation should not be surprising, in particular for biotech, especially since many investors are dramatically overweight
these stocks,” the strategist said in a research note. “In addition, broader market assumptions deserve a little more depth than singular valuation arguments.”

He also noted that about half of all U.S. industries have P/E multiples in line or below their price performance so far in 2014, and more than 60% of all industries have showed improved fundamentals in the past five years.

“Such facts do not reek of a bubble in our view,” Mr. Belski said. “Rather, we believe it is both encouraging and bullish that a majority of industries and the market overall have done a respectable job on a fundamental basis keeping up with price appreciation.”

Related

“Low market volatility has muted market gyrations in recent years. While this is often attributed to complacency, our research indicates this is a logical result of a slow and extended economic recovery combined with an engaged central bank,” Mr. Golub told clients.

The strategist sees less chance of a 10% pullback since a longer string of smaller, daily losses would be required.

“In such an environment, investors trying to buy the dips will spend a lot of time on the sidelines,” he said.

Mr. Golub also highlighted the impact of recessions in the vast majority of bear markets. While many investors may blame the Federal Reserve for down markets, the strategist believes monitoring various recessionary indicators is a much better way of gauging market risk.

His research demonstrates that rising inflation and a flattening yield curve are key factors to watch, both of which support a bullish outlook.